Regulatory Report - May 2022

Standing in for the Queen, the Prince of Wales delivered the Queen’s Speech on 10 May. In the address, he said: “My Ministers will bring forward an Energy Bill to deliver the transition to cheaper, cleaner, and more secure energy. This will build on the success of the COP26 Summit in Glasgow last year. Draft legislation to promote competition, strengthen consumer rights and protect households and businesses will be published”.

Further measures mentioned included the establishment of the UK Infrastructure Bank in legislation, with aims to support economic growth and the delivery of net zero, and commitments to improve transport across the UK through cleaner services under the Transport Bill.

The following day, DESNZ stated that the “Energy Security Bill delivers on the commitment to build a sustainable homegrown energy system that is more secure, clean, and affordable, as well as enabling the extension of the energy price cap beyond 2023”.

It added that the legislation will also establish the new Future System Operator, which will look at the GB energy system as a whole, integrating existing networks with emerging technologies such as hydrogen. Furthermore, the bill will introduce competition in Britain’s onshore electricity networks to encourage investment and innovation.

On 3 May, DESNZ published its response to its consultation on proposed amendments to supply chain plans (SCPs) and Contracts for Difference (CfD) delivery. This aimed to make the CfD scheme and SCPs more adaptable and forward looking to keep pace with the scale of change needed to meet the government’s target of a fully decarbonised electricity system by 2035.

The response confirms the government’s decision to implement a series of amendments to the scheme ahead of Allocation Round 5, including: requiring SCPs from all Floating Offshore Wind projects, shortening the validity period of a SCP Statement of Approval from 12 months to nine months, introducing an ‘Interview with applicants’ stage into the SCP process, raising the standard of SCPs, creating a more precise question template, strengthening the Non-Delivery Disincentive mechanism and amending the CfD Allocation regulations to align to a change introduced for Allocation Round.

As part of its announcement, the government added that it has published a new consultation on Updating the Allocation Round 5 Supply Chain Plan questionnaire which closes on 14 June.

On 20 May, the DESNZ Committee opened an inquiry into the government’s plans to decarbonise the UK’s power supply sector.

The inquiry will examine proposals in the Energy Security Strategy, and the emphasis it placed on scaling up the supply of electricity from nuclear power and hydrogen technology. It will consider how these proposals were reached, and whether the strategy has hit the right balance between investing in these new technologies and existing forms of renewable energy supply. The committee will also deliberate on whether these proposals suitably tie into the government’s wider net zero policy objectives.

In addition, the inquiry will ask whether there any further policy details and/or legislation required by the end of this Parliament and whether energy demand can be reduced and how much of an impact will this make on reaching power supply targets.

On 29 April, the government announced that high energy usage businesses, such as steel and paper manufacturers, are set to receive further support for electricity costs as part of the Energy Intensive Industries (EII) compensation scheme.

The EII scheme, which provides businesses with relief for the costs of the UK Emissions Trading Scheme (ETS) and Carbon Price Support mechanism in their electricity bills, will be extended for a further three years and its budget will be more than doubled. It will now also provide support for companies that manufacture batteries for electric vehicles.

The government also highlighted that it will be looking at further measures to support business. These could include increasing the renewables obligation exemption to 100%, with further details to be announced in the coming weeks. It noted that this is in addition to existing support through the £315mn Industrial Energy Transformation Fund to help heavy industry cut bills and reduce emissions.

The support package was announced as part of a review of schemes to compensate energy intensive industries for indirect emission costs in electricity prices.

On 14 April, Ofgem issued two consultations on its minded-to decisions as part of the Offshore Transmission Network Review (OTNR), both of which close on 9 June.

Following its July 2021 consultation, one covered the multi-purpose interconnectors (MPI) interim framework. The minded-to positions include: not limiting the framework to one MPI model; requiring licence applications to demonstrate primary use of multi-use assets; including a calculation to show expected availability for cross-border flow; introducing a reporting mechanism to monitor asset use over time; interconnector licence conditions changes to bind interconnectors that are part of an MPI to the appropriate obligations; and not inviting licence applications for pre-existing assets to evolve into MPIs.

The other outlined positions on anticipatory investment (AI) and implementation of policy changes. Ofgem considers that the current framework disincentivises developers from making AI, and therefore seeks to increase coordination and establish that AI risk should be shared between consumers and developers. As such, Ofgem is minded-to allow consumers to underwrite the risk of the AI cost gap until the later user starts paying transmission network use of system (TNUoS) charges. It is also proposing to introduce an assessment process to allow developers to come forward with proposals at an early stage.

On 16 May, Ofgem published two consultations on the price cap methodology in response to the recent increase in wholesale prices and volatility, both of which close on 14 June.

The first consultation is proposing to move to quarterly price cap updates with a shorter notice period of 25 working days between setting the cap level and it taking effect. Ofgem is also proposing to include ex ante modelled backwardation costs in the cap methodology. Suppliers would be able to recover backwardation costs over a 12-month period, although the methodology would include a deadband so recovery is only triggered when the market is more volatile than that observed in the first six cap periods. These proposals are all intended to reduce volume risk and costs to consumers.

Ofgem also issued a consultation seeking views on whether suppliers are incurring additional efficient wholesale costs, beyond existing allowances in the cap.

Updated guidance on the treatment of wholesale prices observed during the transition to a new cap mechanism in October 2022 has also been issued, to align with the consultation proposals.